b. the impact of this or other possible scenarios for dealing with the u.s. debt and deficit simon mckay live edge of i.d.c. of capital is here to talk about it and speaking of deficits according to the financial times japan's finance ministry will hold crisis talks with bond dealers tomorrow as politicians there are at odds over a bill that's needed to allow billions more in borrowing to finance the country's deficit sound familiar japan is often brought up when talking about a country the u.s. is ability to run deficits will discuss the lessons for the u.s. and new g.d.p. numbers from the u.k. if you put stock in them they show the countries rebounding from recession growing by one percent is this growth a reflection of better days to come or is it just the result of one off the lympics summer spending we'll talk let's get to today's capital account.

we all know the drill the us has been running trillion dollar budget deficits amounting to more than sixteen trillion dollars in national debt with no plan that the markets have deemed credible to significantly rein in spending let alone balance the budget now c.e.o.'s are trying to act like they want to do something about it they wrote congress asking for a simpson bowles type solution of spending cuts paired with the tax code overhaul eighty of them signed on and there's an argument this over spending cannot go on for ever and that the day of reckoning could be near but then you look at a country like japan one last decade turned into two was the country's government proceeded to rack up debt levels over two hundred percent of g.d.p. yet there's been no cataclysmic explosion in the bond market the yen has actually

seen a dramatic appreciation in its value viz a viz the dollar since the two thousand and eight financial crisis in fact the government of japan can borrow for thirty years at less than two percent according to bloomberg that's a better rate than the u.s. can ask for now this brings me to the u.s. take a look at the exponential increase in the u.s. debt how long can this continue now our guest argues that this increase in nominal debt has been offset by a decline in rates hears the rate for the five year treasury ok well the fed shown a willingness to keep rates suppressed and japan shows that this can keep going and going so why should citizens or businesses in the u.s. be worried why should investors be worried well some of the television co-managing member of ideas is capital is here to tell us those charts you saw that argument you heard me start to lay out those are part of a recent speech he gave and he is going to lay it all out for us first of all thank

you so much mr mccalla bitch for being on the show thank you lauren pleasure to be back and nice to see you twice in one week we ran into each other grants conference what a pleasure that was and we got to talking about this whole concept that we're going to just. us now so you've made the argument that exponential growth in u.s. debt has been able to continue unabated because of the low rates that we've seen at the same time this is allowed the government's interest expense to actually decline we can bring up a chart to show our viewers because in fact the federal government is laying out eleven percent less on interest expense since one thousand nine hundred eight despite a massive increase in the debt that's a pretty good deal from mr mahela which what stops us from continuing. that's a very good point a very good question the thing is that exponential trends in nature that normally are unsustainable because nothing is simply put trees can grow to the sky if something is growing at a compound rate of interest perpetually eventually it runs into limitations systemic limitations the reason the united states debt or global debt has been able

to continue to grow at the exponential rate is because for thirty years i might say we've gone from one trillion dollars of debt in one thousand nine hundred two to sixteen trillion dollars of that now is because the interest rates during the same period of time have declined from something like eighteen percent to virtually zero percent so an exponential increase in debt outstanding has been offset by exponential decline essentially in the rate of debt service and the cost of debt and so as you correctly pointed out we're paying less today for debts in debt service we being the u.s. government than. we did in one thousand nine hundred eight and at the same time the amount of a debt in this has tripled and that's a purely mathematical trick because if you continuously refinance the entire debt structure at a lower and lower cost your debt service is not increasing if you posit that it's possible to continue to roll the debt that all that matters is that service and as

long as debt service remains manageable that then you can just keep on going well the problem is once you get where pretty much there once you get to the minimal level of interest rates every dollar in debt you add adds to debt service even afraid don't go up so let's say we're paying whatever minimal amount we're paying every trillion additional. dollars that's borrowed is whatever incremental additional interest expense and once you've crested or once you've gone through the low point your debt service starts increasing on the same exponential trend as the debt outstanding and that is where you start running into trouble and you believe where they are now that rate cannot. go any lower and so what we're going to see is now debt servicing start to go up just because of the fact that debt is continuing to increase and rates are going to go lower is what you're saying. mathematically it's possible to go a little lower because let's say five year rates are on the one percent but they

could go lower then your rates are a little you know between one and two percent and they can go lower but we are scraping the bottom of the barrel so if we're not at the very very bottom of the cycle we are very close to the bottom and then from here on forward every dollar we borrow is going to increase the debt service and the dead then the debt service the interest expense of the government is going to start increasing on the say as the same rate as debt now it's also important to understand that if rates were to go back to work they were in two thousand and seven which is certainly normal get in. debt service to the government will increase by some three hundred basis points three percent. which is about half a trillion dollars of additional debt service so the federal deficit will increase by another half a trillion service which i think would be very difficult to sustain i mean that's that's a very significant increase i mean right now we see what two hundred seven billion going net increase the interest expense of the government's laying out so let me probe into

a couple of aspects of this you mentioned that rates are very low some can still go lower i want to ask why can't they go lower isn't there an argument that right now the fad is involved in the bond market is it is driving treasury yields down as a result but it's also propping up assets and messes signaling to investors that they want to pile on to these assets things like stocks and that if the fed was to pull out of the treasury market this would actually create a private sector deal leveraging that then could drive people to treasuries to a greater extent that they are now in dr reef even lower than we've seen now. well that assumes that trip. will be forever seen as a safe haven i think well i personally think that we are having a tremendous bubble and safe havens such as treasuries and the dollar for example but the rate of return on treasuries is negative in real terms and so this trick if you will can only go on so for so long is the holders of treasuries are willing to

continue cooperating and as you see in the case of japan there comes a time when the market comes to the government and says we are getting uncomfortable what are you going to do about this and this is what's happening there and this is after many many years of course and there are reasons why european could drag it out for so long i don't think these reasons exist in the rest of the world the economy is slowing down the economy has slowed down japan has was having its troubles during the period of global growth it's a major exporting nations so the nation so they've been able to subsidize their misery if you will we don't have the luxury things like that cannot go on forever for mathematical reasons emotional reasons and practical reasons and i don't think they will but it feels like they could in the middle of every bottle it always feels like things could go on forever but of course as we know they never do and that is an interesting point and so that brings me to your thesis how you see this unwinding you've said that this is a faith based initiative this whole u.s.

dollar fee our currency financial system that we're living in so if the government continues to want to keep rates low continues to want to spend like this how do you see that unwinding. well i think it's important to understand that you know of course nobody can see the future i can't see the future i'm just trying to reason things out based on facts that we know we all know today or at least on what i just said to you that if rates were to go up even to back to two thousand and seven the burden on the u.s. government to pay the interest would be almost impossible to bear so therefore i think it's reasonable to expect that despite the assurances of some exit strategy in the future there really will not be an exit strategy it's virtually impossible to implement as a practical reason so therefore at some moment the market will impose that discipline and the market will impose the discipline when it loses faith in the government's ability to get itself out of the situation that we're in nobody can

predict when that happens but when it happens it usually happens very quickly and without any advance warning so it will have other words what i'm saying is the only way i think it's feasible for rates to go up is in the context of some sort of a market disruption or a market event and that would then force the government and other players to deal with the problems that we have which is a balance sheet problem in income statement problem which is spending more than we take in balance the problem of course excessive indebtedness and additionally the fundamental economic problem is that we have a economy that seventy percent depends on consumer spending and we have shipped the best jobs or manufacturing high paying jobs abroad because of the globalization and the global competitiveness issues and we don't have the you know a lot of good consumers that we used to have capable of spending and so the government is running deficit trying to support the demand which in turn drives the deficit which in turn exacerbates these problems so when this cycle and wind when

there is this day of reckoning and do you see it coming in a foreign exchange market and do you have a prediction of where we would see this. i think that ultimately the government's objective here is not to allow a deal leveraging which is what they have been doing not to allow a deflationary delivery therefore the attempt is to inflate away the on bearable debts and that is being done through quantitative easing through money printing it's called something else it's a sophisticated technology people know what money printing is but when they hear quantitative easing they think it's something else it feels like it's something else but it's really not anything else and so the idea is to slowly transfer wealth if you will from the savers and investors to the debtors that's the objective and of course the attempt is to do it peacefully if you will over an extended period of time in a way that the holders of capital do not see or do not feel being dispossessed a little bit at a time and the problem is that that's what i said before is it's

a faith based initiative because it depends on people on the savers and investors cooperating in this process and when at some moment there's a moment of clarity for them when they realize what's going on and they vote with their feet which is withdraw their assets from debt instruments and try to go into real assets or some other havens that are not what people have perceived or have been perceiving to be havens up to now that's when the trouble starts and that's when you have a market event aha and market event or a peaceful day leveraging or inflating of the debt we're going to talk about what investors should be thinking about in terms of the way that they are allocating their investments or their nest egg for savers are just average folks so that will be in a moment we'll have more with simon mckay live it's co-managing member as i guess this capital and still ahead is glenn hubbard vying for a job at the treasury or fad what's ailing greenspan's view now on the financial system he helped cottle and will ben bernanke back for

a third term and sound like it will delve into all of that in tonight's loose change our central banks you can call it but first your closing market numbers. more news today vaughn a limb says once again flared up. these are the images cobol has been seeing from the streets of canada. trying to look for a shelter old today. wealthy british sailors on. the tires.

market. can. find out what's really happening to the global economy which makes cars or for a no holds barred global financial headlines cons a report. calls fifteen. kilograms of rice one thousand flatbreads. in a bad mood. to tell the group you belong to. it is a done deal. cuckoo

. cuckoo cuckoo cuckoo. cuckoo. welcome back we're talking about how and where and when and why the u.s. is now spending will come to an end there will be a day of reckoning we're going to. be laughing there's nothing funny about it's actually very serious but i don't know if we did laugh maybe we cry so let's bring back in simon mchale of edgecombe an engine member of ideas capital before the break he was laying out how he kind of sees this playing out and why he doesn't think it sustainable and before we move on to solutions or how people should adjust their concepts i do want to touch on a couple of scenarios just because they're in the news so we have c.e.o.'s of eighty companies in the us advocating for some kind of simpson bowles plan

a roadmap to balancing the budget reining in budget deficits are you saying you just don't see this happening because you don't think it's politically feasible that's kind of what i deduced before the break. absolutely right i mean what everybody's focus is on what simpson bowles you know proposes to do it but i don't think that everybody focuses on what the implications would be and you know what they say be careful what you wish for you just might get it good and hard sometimes so in the first place i think the proposals themselves are sensible but they do not go far enough to really solve the problem because we have a massive problem and secondly corporate c.e.o.'s are asking for things that very likely will result in a recession and a significant reduction in natural do you know in the consumer demand because the tax you know taxes will be increasing government spending will be decreased it's not a free lunch and so there doesn't seem to be political will really at this point to inflict any kind of pain and so it's nice to ask for it it's nice to say i want to

do it but actually doing it is a different story and everything the fed has been fighting against and everything that politicians resist because no matter what they say about spending no matter who gets in the white house they want to keep on doing it same in congress so then why can't the u.s. continue on a path like japan because we've seen japan go on for decades able to run these massive deficits and borrow very low cost and just quickly for a moment why is the u.s. different well it's not that the u.s. is different is that what i said before the conditions are different. japan was able to have its sort of sorry state for many years while the rest of the world was growing robustly and japan is a major exporting nation and so in a way it had a source of sustenance from exports we're not a major exporting nation we are importing capital here we were running tremendous deficits the other thing is that japanese deficits were largely financed domestically our deficits are being significant to the significant measure financed

externally and the fed is printing money is monetizing debt so i just don't think that the global situation is such or the united states is not in isolation there's a global slowdown and so everything exists is exacerbated grow. good hard a lot of problems but we don't have that right now so this is don't think we have as long the rope here so either scenario you don't see it ending well what there it's the government tries to inflate and transfers wealth in this works or if everybody says hey we're not going to go for this and there is some kind of major market event so the question is how should people meaning average investors average folks think about their investments their savings their nest egg and perhaps readjust their assumptions about what safety is or what where they should be invested in your view. i think that i think that the most important thing is to understand the traditional concepts about diversification and about correlation between various assets classes are no longer operational in this environment whereas before people diversified between fixed income and stocks and as they grew

older they did it withdrew the money from stocks and more into fixed income which was perceived to be safer i think things that are were used to be safer probably the least safe and perhaps some things that were perceived to be risky perhaps a less risky what i mean specifically is as follows at these rates the upside in fixed income is extremely limited the downside in fixed income is extremely high so being allocated a large amount large portion of your portfolio is a fixed income probably makes a lot less sense today than it did before people need income but they probably should bite the bullet and stay with shorter maturities and reduce their allocation in terms of equities if the government's ability to subsidize demand as i said is not going to be infinite and the natural level of aggregate demand in the economy is less than what we've experienced to some level that means economic pie shrink now go to zero just shrink and that means that there is no room perhaps for every

company to remain profitable and maybe to remain even in business which is to say there will be winners and there will be losers and the implication of that to equity strategies is what's called beta strategies which is just buying the index maybe is more dangerous than it appears because the tide lifts all boats but when some boats are going to sink you want to try to be with those boats that are going to remain a flow that requires active management that requires what's called in the investment business alpha generation which is adding value through active management and the third thing is i think that people need to start thinking very seriously about alternative assets and by that i mean hard assets that are not part of the financial system that are not exposed to operational risks within the financial system which is very highly correlated. self and those assets are real estate and commodities and gold which is has about four different things going for it it's a sense haven it's a. hedge it's

a non correlated asset because it could be own in physical form or through vehicles that hold it in physical form and it's also potentially a total return play because given what's going on in the world and the negative returns and the money printing i think institutional locations to gold are going to increase they're virtually nonexistent right now and the demand will go up against the constraint supply which is very simple and you think that gold is going to inflate you think that it its value is going to increase relative to other assets i'm curious what you just listed for things that you see playing into this what do you think will be the largest player do you think it will be that we will see a real rise in prices and this will be a hedge against inflation and that's where the demand going to largely come from or do you think it's going to be because of this. money printing concern about the currency concern about the financial system i think the way the way things typically develop is that the first you know with a new financial product or in us of class now of course gold is not in us that class right but it is new for this generation and it's not something that people in

this country have owned for a long time because there was no need for that not for the last twenty years let's say but as it flows start arriving typically you know hedge funds and family offices and people of wealth are the first to come and then the more goes to institutional broader institutional investors pimco starting recommend gold as institutional locations most investment banks are now recommending strategic allocations that's when pension funds of institutional money gets involved that's when the general public starts getting involved that's when the flows increase and that's where you see the largest appreciation and the largest move in prices and i think we're going to see that just because of the dearth of viable alternatives and safe alternatives in other parts of the you know another situation right will sign and i have just been very enlightening thank you so much for being on the show for laying this all out he's come managing member of ideas capital thank you.

all right let's wrap up with loose change dimitri copius that is are they would not be complete without more discussion of central banks specifically the federal reserve so let's talk about a couple of little things that have come out so glenn hubbard which is the chief economic advisor to mitt romney or or maybe you know of him is the rudest interview in that movie inside job but nonetheless he is thrown around as is possible treasury secretary or federal reserve chairman and he said he'd rather be treasury secretary this is according to some sources familiar with his thinking that bloomberg reports and that he wants to be more involved in overhaul the tax code this is the architect of the bush tax cuts i should say to. rethink specifically

glenn hubbard's history because i mean you know he was part of the bush administration tax post but i don't really know you know i'm against all these guys i don't think they all i mean you know they're giving up jobs right now so i don't know what to do in general and for tax cuts but i'm also i'm also against all this ridiculous spending so i have to cut cut spending too i don't write i have no opinion on glenn really yeah ok we'll find one of them which we also write right through ok so then let's move on to memory because it's been said that he is not going to be the head of the fed here take a look. ben bernanke he will not be seeking a third term and we know that mitt romney is valid to replace him should he win the election so at this point the right exudes to be on the wall. we know romney doesn't want to release he said as much and it sounds like he doesn't want another term on a first name basis now. i don't want another and ceremonies are the latest so what that's about it's his last supper we have

a beautiful display here you can see ben bernanke here bowing his disciples has fed governors and he is having his last supper except i think this is a fake last supper and i think he's attempting to be such a probably a narcissist that he can't he's not willing to go out looking like he was fired by mitt romney or replaced by obama so they can just play in the summer and i mean if obama says that he would stay what's he going to do outside the fed i mean this is b.s. about their will they say you know bill clinton said he had a really hard time after he left the presidency because everywhere he went he would hear the head of the chief music and he couldn't true well i don't know if they're going to get that what i think it's going to get it's harder if you're not if you were central bank chief and the no longer because you the books and you're the president stops at the president but it starts the. i heard. you have heard the ok so here's my question do you think that if he does go out he goes out in like a blaze of thunder like firing off everything you've ever heard of before you like

nominal g.d.p. targeting. you know suzi going to infinity do you think that when you see them going to that he's going to have a strap on his suicide vest is going to blow up the global monetary mechanism i wish he would i wish he would you know i wish i mean you know with lease it would end there and we could we could start over i'm afraid that we get some kind of bank or unit. or they would read ponzi is up again devious up for another round of monetary global mechanics you know even if he does it there's nothing to say he couldn't come back a few years later and say you know i think this whole thing that i created need to be unwound which brings me to alan greenspan and what you've been saying to me just let me get to this for a second it's my turn list look at what he tweeted so alan greenspan he was the committee. to save the world according to time many years ago and he really coddled the financial industry and was an advocate of deregulation and now look what he is out saying he's been saying this before but look at what someone tweeted that he said at a recent speech he said that greenspan now speaking out against too big to fail

banks says biggest hindrance to higher productivity and growth is misuse of savings at big banks so what do you know there's always a now you can pull the lever and say i take it back that is where we will leave you because we're out of time sorry to me true colors because you have the resurrection is the mixed up or there's the last supper you can always unbroke all right and we can always come back tomorrow so can you in the meantime you can follow me on twitter at lauren lyster you can like our facebook page there it is you can watch us on you tube or on hulu and have a great night. well . it's technology innovations all the developments around russia we've got the future covered. emission and free

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